Fixed Income: Check Whether Your Bank Deposits Are Safe 

There are two implied aspects on safety of bank deposits apart from DICGC insurance cover— government ownership of the bank or whether it is too big a bank to fail.

While deposits in banks up to Rs 5 lakh are now insured under the Deposit Insurance Credit Guarantee Corporation Act (DICGC), the DICGC cover should not be the logic for your investments; go with a bank that does not require the DICGC insurance cover.

The reason is, despite DICGC being there, some co-operative banks have gone bust and the cases are dragging on in the courts. In the case of Punjab and Maharashtra Cooperative Bank (PMC), Reserve Bank of India gave in-principle approval to a takeover by Centrum Financial Services, which would be a positive development. However, in these cases, the DICGC cover is yet to be activated.

What to look at
The first and most important criterion to look at is the ownership of the bank. As per RBI’s schedule of banks, available on the RBI website, there are 12 nationalised banks, including State Bank of India, which are also known as public sector banks. This is the safest category, due to the ownership of the government of India, at least more than 50%. Though it is not a stated guarantee on deposits, like that of DICGC, it is an implied aspect of safety.

This has worked in the past; when a PSU bank is in trouble, the RBI has stepped in and merged it with a relatively stronger PSU bank. In any case, depositors’ money was safe and DICGC coverage was not required. The underlying rationale is, central government-owned banks are an extension of the central government and cannot default, even if the fundamental quality is not good.

After PSU banks, come private sector banks. There are 22 private sector banks in RBI’s schedule. Most of them, at least the leading ones, are in good shape. The RBI has named three banks as systemically important, which are State Bank of India, HDFC Bank and ICICI Bank. Recently, one private sector bank, Lakshmi Vilas Bank, was in trouble and the RBI allowed it to be taken over at a favourable valuation by DBS of Singapore.

Equity shares of the bank were written off. However, depositors’ money was safe. In Yes Bank, additional tier I perpetual bonds were written off, but depositors’ money was safe. Hence in private sector banks, you have to take note, whether you are with a leading private sector bank or one like Lakshmi Vilas Bank. The better quality private sector banks are not just the two systemically important ones mentioned above, there are other relatively better ones too.

Similarly, for foreign banks—there are 46 of them in the RBI schedule— you have to take note whether it is a leading multinational bank or a relatively small one with some presence in India. There are other categories like small finance banks, payment banks, regional rural banks, etc. Deposits may be safe in these banks, but before placing your deposits, you may do your basic checks like whether they have paid their DICGC insurance premium, the quality and size of their balance sheet, etc. In the co-operative bank segment, there are state level co-operatives ones and there are the mid or small sized or local ones. There have been issues in some small sized and local banks earlier.

The message is, you should not blindly go for a higher rate in deposits as the ‘better’ one. A simple framework for a perspective on safety has been discussed above. There are two implied aspects on safety apart from DICGC: (a) government ownership and (b) too big to fail (TBTF). In the non-PSU segment, we have seen Yes Bank and Lakshmi Vilas Bank deposits being ‘saved’ but a few co-operative banks have not been given the long rope.


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